Gas Supply Cuts Disrupt the Fertiliser Sector and Threaten Egyptian Exports

Concern and confusion now prevail among the petrochemical industries, the agriculture sector and traders on the Egyptian Exchange, because of the decision by Egypt’s Ministry of Petroleum and Mineral Resources to cut natural gas supplies to fertiliser companies by between 20% and 30%, and to halt work at some fertiliser plants until the necessary quantities of gas are secured.

The cut comes a few weeks after the Egyptian Natural Gas Holding Company (EGAS) halted gas supplies to petrochemical plants on 21 May, a halt that lasted 11 days, according to press reports, before the Ministry of Petroleum and Mineral Resources announced the gradual resumption of natural gas supplies to fertiliser plants from 6 June.

The outage pushed Abu Qir Fertilizers, Sidi Kerir and KIMA to announce a halt to their plants until pressure on the regional gas networks stabilised after preventive maintenance was completed. Coinciding with the Ministry of Petroleum’s decision to cut natural gas supplies to fertiliser plants, the shares of fertiliser companies listed on the Egyptian Exchange fell collectively on 5 June, by between 3.5% and 6%.

Hossam Arafat, head of the petroleum products division, tells Zawia3 that cutting natural gas supplies to fertiliser plants for 24 hours was accompanied by a partial stoppage of work, while the Ministry of Petroleum’s decision to cut gas supplies by 20% to 25% to the five major plants, including Abu Qir Fertilizers, Helwan Fertilizers and Misr Fertilizers Production Company (MOPCO), caused concern and confusion in the fertiliser sector, since the sector relies fundamentally on natural gas as a raw material and the backbone of fertiliser production, especially urea and phosphate, “which will necessarily affect production negatively and harm the local market, which relies entirely on the output of Egyptian fertiliser plants, and Egypt’s fertiliser exports will also fall if the crisis continues, in the hope that it will end after the new cabinet is formed”.

Arafat points out that the Ministry of Petroleum’s decision has raised fears about its impact on investments and on fertiliser companies’ shares on the Egyptian Exchange, as it could lead to falling share prices and losses for companies and investors, noting that Abu Qir Fertilizers made profits worth billions of pounds in the first quarter of this year; it is the leading company in Egypt, one of the world’s top 50 fertiliser companies, and a major exporter.

There are a large number of fertiliser and chemical companies in Egypt, most notably Abu Qir Fertilizers and Chemical Industries, El Nasr Fertilizers, Abu Zaabal Fertilizers, Delta Fertilizers and Chemical Industries, KIMA, Misr Fertilizers Production Company (MOPCO), EFCO Egypt for phosphate and bio-fertilisers and chemicals, Agrium Egypt for Nitrogen Products, the Egyptian Fertilizers Company, Shams for Fertilizers and Chemicals, Ferchem Misr for Fertilizers and Chemicals, and Rocket for Fertilizers and Chemicals.

Rising Energy Prices

While work temporarily stopped at Abu Qir Fertilizers, Sidi Kerir and KIMA, engineer Islam Warda, a deputy director at Abu Zaabal Fertilizers, told Zawia3 that the Ministry of Petroleum’s cut in natural gas supplies did not hurt the production of the Abu Zaabal plant, because it came while the plant had reduced production and not during the peak season, as September to January is the peak production period for fertiliser plants in Egypt, being linked to the planting season, explaining that the plant was not completely cut off from gas for 24 hours.

The company’s deputy director explains that the fertiliser industry has been affected by higher electricity and natural gas prices, as production costs have increased, leading to higher product prices. The rise in the customs dollar rate and the recent devaluation of the pound also raised the prices of fertiliser plants’ products by about 10%. He stresses that natural gas is the backbone of fertiliser production, and that the company relies on it to produce phosphate and sulphuric and amino acids, explaining that the plant’s output covers the needs of farmers in Sharqia, Qalyubia, Dakahlia and Damietta governorates, and it has a production surplus that is exported abroad.

This is not the first time the Egyptian government has resorted to cutting supplies: the Ministry of Petroleum and Mineral Resources cut natural gas supplies to fertiliser plants by about 30% two months ago, coinciding with the complete halt of gas exports from Tel Aviv to Egypt on 9 October last year, amid the war on Gaza, but fertiliser companies resumed work at full capacity after supplies returned at the beginning of last November. The Cabinet had announced that Israeli gas exports to Egypt fell gradually from July last year, from 800 million cubic feet a day to (zero), after the war on Gaza.

Inflation

Economist Hassan El-Sadi, professor of finance economics at Cairo University, warns that the Ministry of Petroleum’s decision to cut gas supplies to fertiliser plants, together with electricity load shedding, give bad impressions and signals about the Egyptian market, namely that the state is unable to meet its energy needs because of a shortage of foreign currency, which will drive investors away from Egypt and accelerate capital flight. It will also hurt the Egyptian Exchange and lead to a collapse in fertiliser companies’ shares, giving foreign investors an opportunity to exploit the downturn to acquire them, as part of the continuing series of asset and company sales, including Abu Qir Fertilizers.

El-Sadi tells Zawia3 that the decision will create panic among fertiliser manufacturers and distributors, and some traders will exploit it to stockpile fertilisers and raise their prices, which will necessarily affect agricultural produce and lead to new waves of inflation in the prices of some crops.

Meanwhile, El-Sayed El-Naggar, head of the Egyptian Center for Fertilizer Development, considers interruptions or fluctuations in gas supplies to fertiliser plants to be passing incidents that do not significantly affect production, citing the volume of Egyptian fertiliser exports last year and in the first quarter of this year.

El-Naggar stresses that fertilisers of all kinds are still available on local markets and have not seen shortages, explaining that subsidised fertiliser is provided to farmers at EGP 4,200 (USD 200.3) per tonne, while exported fertiliser is sold at global prices, which range between USD 280 and USD 400 per tonne.

Production Halted

Tawfik Said (a pseudonym), a senior employee at Delta Fertilizers, stresses that the fertiliser industry is vital in Egypt because it serves three ministries: agriculture, industry and the public business sector. He explains that there are about 12 fertiliser plants in Egypt, most of them private or sold off, such as Abu Qir Fertilizers, and only three belong to the holding company: Delta Fertilizers, El Nasr Fertilizers in Suez and the KIMA plant, which need their equipment upgraded. He stresses that the industry is based on natural gas, so cutting supplies means cutting production, pointing out that work temporarily stopped at some fertiliser plants days ago because of gas supplies.

The company official, who declined to be named, tells Zawia3 that the former Minister of Public Business Sector wanted to sell the Delta Fertilizers plant after a fire broke out in one of its furnaces, on the pretext that its equipment was worn out, and to turn the land into a residential compound. The workers opposed this, protested and staged a sit-in, and MPs and public figures stood in solidarity with them, so the minister backed down and offered the company for upgrading, but none of the upgrading work has been carried out in three years, during which the plant stopped production and rust began eating away at the equipment. He explains that before the halt the plant produced 1,725 tonnes of urea a day, which could reach 2,250 tonnes after upgrading, with the price per tonne ranging between USD 500 and USD 700, and 500 to 600 tonnes of ammonium nitrate a day, at about USD 370 per tonne, in addition to compounds, acids and liquid fertiliser. Half of the output was provided to the Ministry of Agriculture to supply farmers at a 60% subsidised price, while the other half was exported to Europe, where Egyptian fertilisers are in demand, with a tonne selling for about seven thousand dollars. He stresses that if the plant returns to work, it can earn hard currency and provide the fertilisers needed for the 1.5 million feddan project launched by the President of the Republic, calling on the President to intervene and issue a presidential decree to resolve the crisis of the Delta Fertilizers plant’s halt.

Debts

MP Doha Assy believes that the Ministry of Petroleum’s decision to cut natural gas supplies to fertiliser plants results from declining natural gas production along with the economic crisis and rising debt, and the government’s attempt to save hard currency to pay debt instalments, so that Egypt’s credit rating does not fall and it does not face obstacles and unfair conditions to obtain loans. She explains that Egypt buys nearly half of the output of Egyptian gas and oil fields from the producing companies in Egypt at global prices, under the usual agreements, and its arrears to them reached about USD 12 billion in 2014, of which nine billion was paid in 2018, before the arrears rose again because of weak production and the foreign currency crisis.

Assy tells us that some fertiliser plants, including Delta Fertilizers, need upgrading, not liquidation or sale, as they contribute significantly to providing subsidised fertiliser to farmers. She explains that the Ministry of Public Business Sector had intended to move the plant to Suez, but she requested a parliamentary fact-finding committee, which found that the plant provides fertiliser at a subsidised price, not the market price, and when the difference was calculated it turned out the plant was not making a loss and only needed its equipment upgraded to increase production. The Cabinet therefore reversed its decision to move the plant, and a decision was issued to restart it after upgrading.

The MP believes that cutting gas supplies to fertiliser plants could reduce the output available on the local market and so raise the price of a sack of fertiliser from EGP 650 to about EGP 1,000. She points out that the Ministry of Petroleum’s decision, whose motives are considered financial, needs study by experts in industry, agriculture and trade to determine its potential effects and economic feasibility, and to make sure that the hard currency saved by reducing natural gas consumption exceeds the potential economic losses caused by the decision, especially as Egypt has large fertiliser exports that bring in hard currency. She cited the government’s imposition of import restrictions in 2022 to save hard currency, and the negative effects this had on industry, which led her to submit a parliamentary question to the then finance minister.

Whether the Ministry of Petroleum’s decision to cut natural gas supplies to fertiliser plants is a temporary, passing matter or lasts longer, fears of the economic consequences of government decisions on load shedding and reducing energy consumption, namely higher inflation, lower production and exports, and foreign currency shortages, remain, at a time when the country is going through an unprecedented economic crisis, with annual inflation reaching 33.7% and Egypt’s debt reaching USD 164.7 billion, making it the second most indebted country, with USD 42 billion of that due for repayment this year, 2024.